Why a rainy day fund is more important than ever

With heavy debts and rising job losses affecting many of us, Rachel Robson tells us why we shouldn't sacrifice our savings.

If I asked you a year ago how often you dipped into your savings account and what you used the money for, your answers would probably have been very different then to what they are today.

Of course, now that the rate of return on many savings accounts is utterly pathetic, it can feel like there's little incentive to save at all. But while the economic outlook remains uncertain, and while redundancy levels continue to rise, it's never been more important to make an effort to save.

Saving and raiding

Although saving should be high on our list of priorities, the actual amount we are managing to put aside each month is rapidly declining. According to Birmingham Midshires, the average amount we saved in the last three months almost halved compared to a year ago, at £329 -- a very gloomy prospect indeed.

On the plus side, the amount we've raided from our savings over the past three months has actually fallen 40%, or £204, compared to the same period a year ago. But that's mostly because we're not splurging out as much on holidays, impulse buying, or dining out -- as you can see from the chart below:

Source: Birmingham Midshires

But while it's great to see we're dipping into our savings less frequently for luxury items, if we look to see what we're raiding our savings for more frequently, the picture is a little different:

Source: Birmingham Midshires

Rather worryingly, this chart illustrates that more of us are being forced to dip into our savings due to job losses. In fact, 50% more of us raided our savings for this reason in the three months to January compared to a year earlier. 

What's more, one in ten of us raided our savings due to higher than expected Christmas credit cards bills, up 13% from a year earlier. And 33% more of us used our savings to lend money to family and friends.

So while it may seem like we've adopted a more cautious approach to saving, in reality, I think this just highlights how tough times have become.

Reasons for saving

It probably won't come as a surprise to hear that our reasons for saving have also changed over the past six months.

But while more of us are saving for a deposit on a house or a wedding, fewer of us are managing to save for retirement or for a rainy day.

Figures from Birmingham Midshires show that in the three months to January 2009, 15% of us saved for retirement, down 17% from the three months to July 2008. Meanwhile, 26% of us saved for a rainy day fund, down 10%.

At a time when many of us have seen a significant sum of money wiped off the value of our pensions and redundancy levels are rising, ensuring you have some extra savings to fall back on is crucial.

Don't sacrifice your savings

Many of us have been forced to tighten the purse strings over the past year, and finding extra cash to put in a savings account can be a challenge. But having a safety net to fall back on in case of an emergency is crucial.

If you are finding it difficult to save, see if you can make cut backs elsewhere. The best way to help you do this is to keep a spending diary and set up a list of earnings and outgoings -- you can do this by using a nifty online calculator known as a statement of affairs.

And for more tips on how to budget, read Five Steps To Brilliant Budgeting! or check out our Money Saving Tips for more ideas.

If you need a helping hand at being more disciplined with your savings, you could open a regular savings account. That's because in order to qualify for the full interest rate, you must pay into the account every month by standing order. Right now, the Barclays Monthly Savings Account is offering a fixed interest rate of 6% AER for one year. You just need to pay in between £20 and £250 a month, but you won't be able to make withdrawals.

Alternatively, you could plump for a fixed rate bond providing you're prepared to lock away your funds for a year or two.  If you have at least £1,000 to isave, ICICI's HiSAVE Fixed Rate Account is offering a fixed rate of 3.9% AER for one year.

But if you know you'll need access to your savings, your best bet is to choose a variable rate savings account. The Egg Savings Account is currently offering an interest rate of 3.5% AER which includes a 2% bonus for one year. There are no penalties if you need to withdraw money and you can start saving from just £1. Do note though that the interest rate on the account is variable, so could change at any time.

So as these uncertain times continue, please don't sacrifice your savings. While no one knows what the future holds, it really is more important than ever to build up a nest egg to protect yourself from whatever's round the corner.

Compare all sorts of savings accounts here.

Comments are not gone forever!

We’ve had to take article comments down temporarily as we set up our new home on lovemoney.com, but new comment tools (and your old comments) will be back soon.

More: Kaupthing Savers Face New Dilemma | Five Top Instant Access Savings Accounts